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MACD Aggressive Setup MACD Conservative Setup DeMark REI Setup REI Stochastic Setup REI Note 9/30 Setup
Fast Stochastic (REI Substitute)
Location: With the Trend
Much has been written about stochastics and how to trade them. In this case, we are interested in having an indicator duplicate the action of the DeMark REI as much as possible and to be reliable. I am not interested in where the indicator turns over or crosses over. I want the entry into buy and sell zones to be as accurate as possible and let the price action control the trade entry using the same techniques as the REI.
The values are 5, 2, 2; overbought is 60 and oversold in 35. Midpoint is 48.
Additionally, I am only interested in the K line (slow line), not the D line (fast line).
So if you can blend the D line into the background, all the better. I would use this arrangement only in the direction of the Moving Average. Personally, I would never trade against the Moving Average with this. As in the Range Expansion Index, there are two types of the entries. They are the Market-On-Bar-Close and Buy/Sell Stop Method. Refer to the section on the REI for the specifics.
We are looking to take the trade in the direction of the Moving Average (30WMA).
With price bars and Moving Average going in the same
direction, the stochastic will reach an extreme zone. On any retracement or
consolidation, the indicator will pull back in a direction opposite the
Moving Average. Once the indicator enters the zone to initiate a trade in
the direction of the Moving Average, we initiate the entry methods outlined
in the earlier REI Section. This would be a conservative entry.
There is a school of thought on the use of stochastics that enables a more aggressive entry. One can get on moves that the conservative entry misses but will have some additional failures as well. In a rapidly trending market, this aggressive entry may be the only one you get due to the retracement of only a bar or two. This setup begins when the indicator has retraced to midpoint (48) between the values of 60 (overbought) and 35 (oversold). At this point, the aggressive zone of opportunity has been entered. The entry methods are the same as in the conservative.
To illustrate how this works the following charts will show both the REI and the fast Stochastic. The REI will be below the fast stochastic (5,2,2).
Here we see the Fast Stochastic above the
REI and the Moving Average is up. We want to go long. When the
indicator drops into the Buy Zone, we begin to look for the
opportunity to enter long. We have three examples. Note that
the second one would have resulted in a loss. Here is where it
takes conviction to reenter three bars later. And if you
examine the second entry closely, you’ll see that it really did
not qualify as an entry. The reason it did not meet the
qualifying condition is discussed in the REI Section. But some
will be lulled into taking #2 just because the indicator dropped
into the buy zone.
|In this sell example, I show an aggressive setup first. Note the indicator retraced above the 48 midpoint value. The next three sell setups are conservative. Note that #3 (2nd conservative sell) does not meet the qualifying requirement but is touching the upper BB. As John Bollinger says, “Sell when touched.”|